Editor’s note: This is the latest column in a recurring series by James O’Reilly, multi-time industry CEO (Ascent Hospitality, Smokey Bones, Long John Silver’s, and former Sonic and Yum! Brands executive). O’Reilly explores industry hot topics and offers a roadmap for how operators can win over consumers in an ever-changing restaurant dynamic. The first story, on what drove traffic last year, is here. The second, on why pricing alone won’t fix the problem, is here.
For a few years, nearly every strategy in the restaurant industry seemed to work. Pricing offset traffic softness. New unit growth signaled momentum. Promotions drove bursts of volume that masked underlying weakness. But markets are cyclical and eventually normalize. And when they do, pressure doesn’t create weakness, it reveals it. Traffic is uneven. Growth is moderating. Capital is more disciplined. And in this kind of market, the difference between a durable brand and a dependent one becomes hard to ignore.
Traffic Softness Is Separating Operators from Promoters
Q4 industry performance showed positive same store sales with low single-digit traffic declines. This means that through a combination of pricing and promotions, restaurant brands charged more per transaction than the prior year. A look at consumer macro factors such as sentiment, delinquencies, inflation, and real wage growth, reveals that restaurant industry consumers are feeling as much if not more pressure than ever to make ends meet. And while consumers must necessarily pay more for their restaurant visits in most situations, they balance their spending by reducing visits.
There have generally been two kinds of responses to this demand environment. Brands that had already been reliant (or too reliant) on aggressive discounting have had to increase the intensity of these strategies in reaction to a more challenging consumer situation. In other cases, brands with underlying demand strength are showing the ability to generate steady if not growing visit counts, while also being able to grow spend. Traffic that is bought is not the same as traffic that is earned, but durability is not just about traffic trends. It is unit economics that reveal structural strength.
Unit Economics Are the Real Moat
Acknowledging the importance of topline sales and durable traffic levels, these do ultimately remain secondary to the importance of unit economics. Unit economics are the engine of EBITDA growth, liquidity, and business success. They not only ensure a restaurant company remains viable, they also are the differentiator between high value and low value companies.
That being said, it is well known that labor costs remain elevated relative to pre-2020 levels; the National Restaurant Association has reported that labor is a meaningfully larger percentage of sales now than it was in 2019. Public restaurant companies have also cited margin compression tied to labor and promotional intensity in their Q4 earnings releases. COGs can be more variable and sector-specific, but addressing and improving COGs is a matter of strategy, discipline, and testing. In both the cases of labor and COGs in the restaurant industry, a robust approach of data, strategy, testing, and implementation does provide improvements to prime cost (labor + COGs) that are durable and not brand-damaging. Starbucks announced at their January investment conference, a $2 billion cost savings initiative containing 90+ projects that are being managed with a stage-gate process. This is how disciplined margin expansion is achieved.
Four-wall economics allow brands to absorb volatility. At times like this while traffic is softer and AUVs might be declining, brands with thinner four-wall margins can become destabilized, which can create a cascade of other consequences that are disruptive to the business and its people. Stronger four-wall margins provide a financial moat for brands when AUVs are under pressure, as they generally are in the current environment. Further, margin durability gives a restaurant brand more strategic flexibility in challenging situations, compared to thinner-margin businesses whose choices become more limited, out of necessity. I have led businesses in both situations, and the key learning is always the same; unit-level EBITDA isn’t just a metric, it determines whether a restaurant system can withstand volatility without destabilizing. And the benefits of strong four-wall margins extend even further.
Development Discipline Is Replacing Growth Optics
We are reading about large chains strategically closing locations, sometimes in the hundreds. And we also see a shift in tone in earnings calls from aggressive expansion to selective development. Net unit growth projections are moderating, and operators are referencing stricter site criteria extended development timelines.
It hasn’t been long since business cycles rewarded unit growth commitments over return profiles. That push to expand aggressively is one of the root causes of the closure headlines we are seeing today. To be fair, rationalizing a portfolio and shrinking the unit footprint is necessary at times. I have had to do it, and it is never easy. But development decisions made under supportive macro conditions sometimes receive less scrutiny on returns. When AUVs shrink and margins compress, those same decisions become costly. In today’s environment, return thresholds and franchisee economics matter more than ever; companies cannot lean into development on hopeful assumptions. Build costs, lease structure, utilities, and labor create structural obligations that require enough revenue to sustain four-wall margins and the returns franchisees need to survive and thrive.
All of this makes more selective development a strength in today’s environment, when it can otherwise look like weakness or lack of conviction. Getting the fundamentals right making development decisions (does the pro-forma provide an attractive return on conservative assumptions) is foundational to success in our industry. It sets the stage for strong margins, franchisee success, and helps create an economic moat around a restaurant company. The truest signal of system strength, however, is franchisee health.
Franchisee Health Is Where Strength Becomes Visible
With news of restructurings, bankruptcies, and large closure numbers, it’s clear this is a time of change and rationalization in the industry. The restructurings in casual dining and QSR were widely reported by the trade press in 2025, and the stress that some franchisees are under is clear, especially in traffic-pressured sectors. From experience I can say that franchisee distress rarely appears overnight. When a franchisee chooses to invest in a restaurant brand, what they are really investing in is a brand’s unit economics. Strong unit economics in brands generally lead to remodel investments, stable transfers, and continued franchisee interest.
Weak unit economics however can lead to closures, transfers and dreams dashed. Ultimately, the financial health of a brand’s franchisees is not a lagging indicator to study, it is the clearest expression of structural brand strength. A best practice I recommend is to regularly meet with franchisees to discuss their unit economics and reinvestment thinking, to understand their financial health and ability to grow. These conversations unfailingly reveal the challenges that franchisees are facing with their unit economics, and engaging franchisees transparently on this subject is an important step toward improving the financial health of a restaurant company. Engaging franchisees early, often, and in a high-quality way across franchise businesses is a best practice for building a durable company.
This Is Not a Downturn Story, It’s a Differentiation Story
The current demand environment in the restaurant industry reminds me of the 2008/2009 period, which also was marked by softer demand and pressured consumers. And like that time period, this market environment is not catastrophic, it’s a time for recalibration. As the industry deals with more closures and bankruptcies, balance sheet strength and unit-level margins are also key differentiators. Promotions can stimulate visits, and pricing can lift comp sales, but those companies focusing on structural durability are the ones thriving today. These companies have differentiated brands, but they also have differentiated economics.
Cycles Don’t Create Strength, They Expose It
Slower markets are uncomfortable. They compress margins. They challenge traffic assumptions. They force harder decisions. But they also provide clarity. When demand is abundant, most strategies appear viable. When it moderates, durable models endure. Pressure does not determine which restaurant brands survive the next cycle. It reveals which ones were built to.
James O’Reilly is an award-winning CEO and board-level leader with more than 25 years of experience driving growth and transformation across public, private, and PE-backed restaurant and consumer businesses. He is a 10-year private company CEO with 15+ years of experience in restaurant and CPG marketing. He was recognized as a 2025 Georgia Titan 100 CEO. His brands have earned Newsweek America’s Favorite Restaurant Chains honors and he’s been a featured speaker at FSR’s NextGen Restaurant Summit.
